IFRS 5 Non-current Assets Held for Sale and Discontinued Operations — Summary, Worked Example & Practice Questions

It helps to read IFRS 5 as two documents stapled together. One half changes how you measure and where you show assets that are on their way out of the door. The other half changes how you present the results of an operation the entity has exited or is exiting. The two often appear in the same transaction — selling a whole division triggers both — but they are independent, and a question can engage either one alone.

The measurement half applies to non-current assets and to disposal groups, a disposal group being the bundle of assets and any directly associated liabilities that will change hands in one transaction (IFRS 5.4). The presentation half applies to discontinued operations, which is a much narrower idea: a single machine on the market is held for sale, but it is nowhere near being a discontinued operation.

Something else is worth noticing early. Once the classification conditions are satisfied, applying the standard is not a choice, and the assets do not keep depreciating quietly in the background. That has an earnings effect, which is precisely why the entry conditions are drafted as tightly as they are.

An asset earns the held-for-sale label only where its value will be recovered mainly by selling it rather than by carrying on using it, and two hurdles have to be cleared together (IFRS 5.6–7). First, the asset has to be capable of being handed over as it stands, on nothing more than the terms that ordinarily attach when items of that kind change hands. A factory the entity intends to keep running for another eighteen months while it completes existing orders is not in that state, because the buyer cannot take it now. Second, the sale has to be highly probable — a deliberately stronger requirement than merely likely.

That second hurdle is unpacked into a checklist, and every part of it has to hold at the reporting date.

• Those with authority to approve the disposal have decided to go ahead with it, rather than merely discussed the possibility.
• A genuine search for a buyer has begun and is being pursued, not simply scheduled for some later date.
• The asset is being actively marketed, and the price being asked bears a sensible relationship to what it is currently worth — an unrealistic asking price is treated as evidence that the entity is not really committed.
• Completion is expected within a year of the classification date.
• The plan is unlikely to be materially altered or dropped; a proposal still awaiting shareholder or regulatory approval that could realistically be refused generally fails here.

The twelve-month expectation can be exceeded, but only in narrow circumstances: the hold-up must have been caused by something the entity could not have prevented, and there must be clear evidence that it is still pushing to complete the sale (IFRS 5.9). A buyer's financing falling through, or a competition authority taking longer than anyone anticipated, can extend the period. An entity that simply decided to wait for a better market cannot.

The trap that catches most candidates is abandonment. A plant the entity plans to shut down, mothball or scrap is not held for sale, because nobody is going to buy it — whatever value remains will be extracted by using it until the shutdown date (IFRS 5.13). Such an asset keeps depreciating, and the useful life is shortened to the date operations will stop. Assets being retired but not sold are handled the same way. Note also that some items are outside the measurement rules altogether even when they are on the market, including deferred tax assets, financial instruments within IFRS 9 and investment property held at fair value; they keep being measured under their own standards, though the presentation rules still apply.

There is a step that is easy to skip and costs marks when it is skipped. Immediately before the classification takes effect, the asset is brought fully up to date under whatever standard has been governing it: the depreciation charge to that date is recognised, any revaluation due under IAS 16 is put through, and an impairment test under IAS 36 is performed if there are indicators. Only then does IFRS 5 take over the measurement (IFRS 5.18).

From that point the asset sits at whichever is lower of the carrying amount it has just been brought to and its fair value less the costs to sell — the direct expenses of disposing of it, such as agents' commission and legal fees, but not finance charges or tax (IFRS 5.15). Where the sale-based figure is the lower of the two, the shortfall is an impairment loss charged to profit or loss straight away.

Depreciation and amortisation then stop, and they stop completely — not reduced, not suspended pending review (IFRS 5.25). The logic is that the carrying amount is no longer being consumed through use; it is waiting to be converted into cash. Interest and other costs relating to the liabilities of a disposal group carry on being recognised as normal, because those obligations have not gone anywhere.

If the amount the sale would net later recovers, the improvement is taken as a gain in profit or loss — but there is a ceiling. The gain cannot exceed the impairment losses already recognised on that asset, counting both any write-down under IFRS 5 and anything previously charged under IAS 36 (IFRS 5.21–22). In effect the asset can climb back to where it would have stood without the write-downs, and no further. This is the single most reliable place for an examiner to hide a mark.

Where a disposal group is involved, the comparison of carrying amount against fair value less costs to sell is made for the group as a whole rather than item by item. Any resulting write-down is then spread over the non-current assets in the group that fall within the measurement rules, in proportion to their carrying amounts; assets scoped out, such as inventories or financial assets, are measured under their own standards first and are not touched by the allocation.

A discontinued operation is a component of the entity that has either been disposed of or now meets the held-for-sale conditions. A component means a part of the business whose operations and cash flows can be told apart from the rest, both in how it was run and for reporting purposes — typically a cash-generating unit or a group of them (IFRS 5.31). Being a component is necessary but not sufficient; the part being exited also has to satisfy one of three descriptions (IFRS 5.32).

• It represents a distinct and significant strand of the entity's trade, or the whole of its activity in a particular part of the world.
• It forms one piece of a single overall plan to withdraw from such a strand or such a territory.
• It is a subsidiary that was bought purely with the intention of selling it on.

Once something qualifies, its results are lifted out of the ordinary line items and condensed into one figure on the face of profit or loss. That figure combines the after-tax result the operation produced for the period with the after-tax effect of writing it down to fair value less costs to sell, or of the disposal itself where it has already happened (IFRS 5.33). The breakdown — revenue, expenses, the pre-tax result and the related tax — is given in the notes, and the cash flows attributable to operating, investing and financing activities are disclosed as well.

The asymmetry in the comparatives is a favourite exam point. The income statement for the prior period is re-presented so that the same operations sit in the discontinued line in both years, which is the whole purpose of the exercise: a reader wants to compare this year's continuing business against last year's continuing business on the same footing. The prior-period balance sheet, by contrast, is left exactly as it was filed (IFRS 5.34 and 5.40). Nothing is moved into a held-for-sale caption retrospectively, because at that earlier date the entity was not selling anything and the original statement told the truth about its position.

Sales collapse. Where an asset no longer meets the conditions, it leaves the held-for-sale category and returns to normal accounting, and the standard has to unwind the pause in depreciation without simply pretending the intervening months did not happen (IFRS 5.27).

The asset comes back at the lower of two amounts. The first is what it would have been carried at now if it had never been classified at all — its old carrying amount reduced by all the depreciation, amortisation or revaluation that would have gone through in the meantime. The second is its recoverable amount at the date the entity changes its mind, meaning the higher of what it would fetch net of selling costs and what using it is worth, as those are measured under IAS 36. Whichever is lower becomes the new carrying amount, and the difference against the amount it was sitting at is taken to profit or loss in the period of the change.

Where the item was a discontinued operation that will now be retained, the results that had been shown as a single discontinued figure are folded back into continuing operations, and every period presented is re-presented on that basis. The notes explain what happened and why, since a reversal of this kind tends to say something about the reliability of the entity's earlier judgement.

Presentation is mechanical but marks are lost on it. Assets classified as held for sale are reported apart from every other asset, and where a disposal group is involved the liabilities that travel with it are reported apart from every other liability (IFRS 5.38). The two captions are shown at their own totals and are never netted against one another, however obvious it may seem that a buyer will take on the debt along with the assets.

Two further points follow. Assets in this category are not subdivided into the usual current and non-current classes, and — as noted above — the prior-period balance sheet is left untouched, so a reader comparing the two years will find the held-for-sale caption appearing in one column only. Any cumulative amounts recognised in other comprehensive income that relate to the assets, such as a revaluation surplus or a translation reserve, are disclosed separately within equity rather than being recycled early.

The narrative disclosures do the rest of the work: a description of what is being sold, the circumstances that led to the decision, the expected timing, and the segment in which the assets or the operation were reported (IFRS 5.41). Where a write-down or a later recovery has been recognised, the amount and the line item containing it are given too.